Britain's rock-bottom interest rates could threaten the UK's economic recovery if they stay at their historic lows for too long, a Bank of England policymaker has warned.
Kristin Forbes, a member of the Bank’s Monetary Policy Committee (MPC), said that while the recovery is now “well in progress”, the central bank’s interest rate remains at its emergency settings.
Speaking at the Institute of Economic Affairs in London, she said that keeping rates low could pose risks to the financial system, threaten to generate excessive inflation, and generate asset bubbles.
The MPC has voted to keep the Bank’s rate at 0.5pc since March 2009. In February the committee's nine members voted unanimously to hold rates, as inflation tumbled to a record low of 0.3pc in the year to January.
While low rates provide a “number of benefits”, some of those risks no longer appear “moderate and manageable”, Ms Forbes said. Specifically, that low rates might increase inequality, reduce productivity, and make it hard to respond to future crises.
With interest rates very close to zero, policy may be constrained by the so-called ‘zero lower bound’. Ms Forbes said that this “means that the available “tool kit” to sharply loosen monetary policy is more limited”.
“But this cost has been alleviated somewhat by the ability to use non-conventional tools,” as well as the possibility of pushing the Bank’s rate lower still, she argued.
“Extremely accommodative monetary policy could be contributing to slower productivity growth and inequality,” the MPC member said, while noting that the evidence for this view “is partial, very mixed, and far from conclusive”.
However, she stressed that most of these risks were for now “moderate and manageable”.
Low interest rates could work in two directions, to both increase and reduce inequality, Ms Forbes said. “It is unclear what the net effect on equality is of a prolonged period of extremely accommodative monetary policy,” she continued, but argued that higher rates may not help to increase productivity or reduce inequality.
“Near-zero interest rates do not yet appear to have gone the way of Midas’ touch,” Ms Forbes said, suggesting that the costs of wealth generating policy had not yet exceeded its many benefits.
Yet she stressed that rates must not be raised too late, or it may not be possible to prevent damage from too loose. “Hopefully we will not wait until the costs are as high as when King Midas turned his daughter in gold,” she concluded.
“But this cost has been alleviated somewhat by the ability to use non-conventional tools,” as well as the possibility of pushing the Bank’s rate lower still, she argued.
“Extremely accommodative monetary policy could be contributing to slower productivity growth and inequality,” the MPC member said, while noting that the evidence for this view “is partial, very mixed, and far from conclusive”.
However, she stressed that most of these risks were for now “moderate and manageable”.
Low interest rates could work in two directions, to both increase and reduce inequality, Ms Forbes said. “It is unclear what the net effect on equality is of a prolonged period of extremely accommodative monetary policy,” she continued, but argued that higher rates may not help to increase productivity or reduce inequality.
“Near-zero interest rates do not yet appear to have gone the way of Midas’ touch,” Ms Forbes said, suggesting that the costs of wealth generating policy had not yet exceeded its many benefits.
Yet she stressed that rates must not be raised too late, or it may not be possible to prevent damage from too loose. “Hopefully we will not wait until the costs are as high as when King Midas turned his daughter in gold,” she concluded.
